Malt Liquidity 17
Enjoy the Noise
The Noise is the Signal
So uh, this happened:
I wrote a little while back about how IPO “ticker diffusion” is a thing, most notably in the cases of ZOOM when people intended to buy ZM, and TWTRQ when people intended to buy TWTR. But as I like to point out, trading returns aren’t really knowledge or skill dependent: being tech savvy and knowing that Elon was obviously talking about the encrypted messaging app Signal wouldn’t have helped you catch the ride up on a stock whose certificates would be more useful as rolling papers than as equity exposure. No, SIGL does not make signal! But why google something when you could just type it into your broker and buy the stock? A constant expression I use references the signal to noise ratio: when you have a lot of extraneous information - say, stock prices - you want to sift through the “noise” to find the useful stuff to trade on - the “signal”. For example, yesterday I talked about a potential way to convert stock speculation to account for delisting risk. However, if everyone trading a stock disregards the “signal” part entirely, the noise and pure price action really is the signal. I didn’t think anything could get more ridiculous than the Hertz fiasco, but apparently millions of dollars are being punted back and forth in single digit lots because, well, Elon. I suddenly empathize with economists dealing with the constant mocking they get for “explaining things after being wrong about why something shouldn’t happen”.
Cattle futures are so 19-seventy-late
Now that everyone has conveniently forgotten about water futures, it’s time for a new market for the gamblers with margin approval to enter:
China’s live hog futures tumbled on their first trading day after a hotly anticipated debut as the industry looks for a safeguard against wild swings triggered by one of the world’s worst animal disease outbreaks.
The contract on the Dalian Commodity Exchange slid almost 13% on Friday. The product, some 20 years in the planning, aims to provide a key hedging tool for hog breeders recovering and expanding production after a deadly African swine fever outbreak destroyed local herds and drove prices to a record.
Futures markets have a long and storied history of being used for the benefit of commodity hedgers and degenerate gamblers alike, and it’s nice to see a tool that is genuinely useful for farmers being opened for trading, as opposed to the CME x Michael Burry marketing vehicle that water futures are. I dislike the use of ‘tumbled’ in the article, though - if futures are being introduced to provide liquidity to a market, then naturally one can assume that there is a liquidity premium on top of the scarcity premium that caused prices to rise in the first place. It would make sense that price discovery happens in a downward direction as hedgers are inherently going to be biased towards being net short contracts, and speculators in the short term will naturally be biased towards following momentum.
More than 90,000 lots changed hands.
“The trading volume of the live hog futures is expected to be massive, given the relevance of the product to the broader economy,” said Li Moyu, a Shanghai-based analyst at Orient Futures, a brokerage. Trading will be dominated by the country’s leading producers at the beginning, she said.
90000 is a lot of futures for day 1! (Remember, water futures had a first day volume of like 2.) Since the product has a deliverable, and prices are at highs, it makes sense to “lock in” prices - which is what being short a contract while being a producer would essentially do.
The exchange has also taken steps to avoid the bouts of manic trading seen on Chinese commodities exchanges in the past, when the nation’s hordes of speculators piled in and out of everything from eggs to iron ore.
For the latest contract, DCE has set price limits at 16% for the first trading day and 8% subsequently. It’s imposing margin requirements of 8% for clients with hedging needs and 15% for speculative trading during the initial stage.
There’s also a cap on open positions, which is designed to stabilize the market and prevent futures from becoming overpriced,…
While I am a bit hesitant to endorse price controls, it is better than having traders outright cornering the market to the point where the power supply is constantly cut and a governor is recalled. And when you don’t have to deal with freedom of speech, it is easier to argue that fiduciary duty is, in a way, government-approved trading only. Signals don’t really get clearer than that.
Fawlty Markets
The insightful-turned-aphorism statement that is “cryptocurrency markets function by unlearning then relearning the progressions of modern finance” is continuously relevant in these times. Apparently, “investors” are so desperate to get into bitcoin that demand is surfacing for products they don’t even understand the exposure of:
London-based Marex Spectron Group Ltd. is selling a structured product known as an autocallable to people with at least $200,000 to invest, according to a term sheet. If the cryptocurrency stays relatively stable for awhile, Marex claims investors could reap an annualized return of as much as 70% via monthly coupons.
It is unfathomable to me that anyone would want this product. Bitcoin (and crypto in general) is a long skewed product: there is no clean way to short it. There are offshore exchanges which offer exposure to the downside in the form of sketchy options, and cash-settled futures, but without any easy direct hedging mechanism - which would be shorting the product directly - the sell pressure you need for your trade to gain momentum is inherently not there. “Cash settled” products are just a fancy way of saying that you’re placing a bet through the product provider that affects the liquidity indirectly at best - you don’t get the direct benefit of, say, market selling 40 BTC short and dropping the price through retail bids. (You might note that why crypto futures trade at a slight premium/discount to the actual currency is specifically because there is no clean arbitrage like on SPY/ES to keep them in line.) But in this specific product, you are selling the upside on a highly volatile product for 30% downside protection on a product that would probably drop 50%+ on any real selling momentum. Your exposure would resemble selling a really inefficient put spread to the product issuer - you get the “premium” in the form of your money + a coupon, but you lose out on all the upside, again, on a long skewed product, and you lose if the underlying drops more than 30%. Somehow, there is a market for a net short vol product on BTC where the issuer will win every time by just underpricing the vol and pawning it off on “sophisticated” investors. Traditionally, institutions are the ones who are selling the options! That’s the finance version of “the house always wins”! Clearly, the product issuer is long BTC in some capacity and is trying to hedge by pawning off these shitty products on oblivious, greedy speculators who can’t even figure out that they’re capping their gains on the actual greed trade.
“The idea that you want to sell out all the upside in order to get a coupon and 30% downside protection seems pretty unintuitive -- but these kind of structures in general are wildly popular,” said Benn Eifert, chief investment officer of hedge fund QVR Advisors. “I imagine they’ll find demand.”
I can hear this guy sighing as he was quoted on this.
On that note…